Good morning

With less than 48 hours to go before the Scottish Referendum, GBP/USD continues to trade erratically and volatile as polls continue to show the 2 camps neck and neck. While these polls still appear to show the YES vote in the running, financial spread indexes appear to show another side. Specifically the odds on the NO vote winning stands at approximately 81%, meaning there is an 81% chance that the NO vote will prevail.  As I have noted previously, the NO vote must win by a “healthy” margin to reassure the market that at least for now we are a Union and the public has spoken. What is interesting and a subject that has not been debated is WHY THE REST OF THE UK is not able to vote. Surely given the importance of the vote and its effect on the rest of us, surely we too should have been given the right to cast our vote and make our voice heard. You know only too well how I feel on the subject and I should have been given the right to vote too.

Latest polls reinforce the closeness of the vote. The average of polls taken thus far in September shows NO votes ahead 46.1% to 43.6%, but within most of the polls’ margin of error of 3% and with a still large number of undecided voters. Earlier this month the surge in the YES vote appears robust across polling companies, though the undecided vote still holds the key to the final outcome.  Various measures suggest the probability of a YES vote is significant, but below 50%. An average of UK odds makers’ prices leads to a still lower 24% probability.

It is my opinion that the NO vote will prevail and what we are witnessing in the FX markets are common behavioral patterns. The markets is “priming” itself in that it “sells the rumour, buys the fact”. In other words it will drive GBP/USD lower (EUR/GBP higher) ahead of the result, start buying GBP against both the $ and € and then once the polls/results are announced the inevitable knee-jerk reaction ensues which drives GBP higher at an almighty pace. At the same time, GBP volatility will “collapse” as the event risk is now out the way. It was for this reason that last week I suggested BUYING 2 week GBP volatility vs SELLING 1 month volatility. What this would have given you was “gamma” ahead of the election, and post-election allowing you to make money from a move (either way) in the GBP. Once that 2w option expired, and with volatility now depressed, you would have been in a position to buy you 1m (now 2w expiry) option back at a lower volatility level. Classic calendar spread taking advantage of the event risk.

Apart from the referendum on Thursday, today we have UK CPI and PPI numbers (9.30am) as well as German ZEW (Confidence) at 10am. Tomorrow (Wednesday) in itself offers up some spicy announcements. First we have the MPC vote count (Last month 7-2 votes) at 9.30am followed in the evening by the FOMC decision and statement (on interest rates). I believe Pres. Yellen will make some reference to the timing of the US rate hike which in itself will add further support to the USD. As you are quite aware by now, I am very bullish the USD and have been for many months and continue to look for a break towards 1.2000 by year end. Taking the Referendum aside, these events (above) offer another chance to see how the CB’s are leaning towards rate hikes and therefore bringing with it added FX volatility. Not to be forgotten we STILL have a situation in Ukraine which has not gone away (other world events in the spot light) and that little impending “war” in the M.E that needs sorting immediately.

FX volatility levels remain bid with the EUR/USD 1m 7.50/7.65 (+0.20%), 6m 7.50/7.65 (+0.15%), 1y 7.95/8.00 (+0.15%) — GBP/USD 1m 9.35/10.15 (+0.50%), 6m 7.20/7.80 (unch.), 1y 7.40/7.90 (unch.) — EUR/GBP 1m 9.40/10.00 (+0.25%), 6m 7.30/7.80 (unch.), 1y 7.40/7.90 (unch.) — Remember it is not about the back end volatility, it is all about GAMMA and the front end which explains why in the numbers above there is no movement in 6m+1y GBP vol. If the NO vote prevails as I expect it to, front end volatility will collapse as expected as the “event” risk is out the way. However G-D forbid the YES vote prevails, volatility levels will in all likelihood stay firm and go higher as we enter the unknown or more aptly put the FINANCIAL ABYSS. If you thought your pension was suffering during the financial crisis of 2008-2013, well simply put that would be NOTHING compared to what you are likely to see from the fall out following a YES vote. Perhaps the Scottish public should think more about their financial well being than the importance of having a passport with the name Scotland on it. Truth is when everything is said and done, chances are Scotland won’t even have the money to buy the paper to print their passports in the first place!!!! Welcome back to the depression of 1920 Scotland, hope you happy with your vote!!

Have a great day ahead